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IPAA Private Capital Conference D. Martin Phillips

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  1. IPAA Private Capital Conference D. Martin Phillips April 19, 2004

  2. EnCap Investments Overview • Privately owned investment firm • Leading provider of growth capital to the independent sector of the U.S. oil and gas industry since 1988 • Exclusive focus on oil and gas industry (upstream and midstream) • Currently investing 10th institutional fund and 4th private equity fund ($528 million) • Targeting a new $700 million private equity fund to close in June 2004


  4. Private Equity Overview • Privately negotiated equity capital utilized as an alternative to traditional financing sources • Primarily focused on corporate issuers (typically private) • Frequently structured as preferred or common stock or some combination thereof • Seeks an annual rate of return of 20% or greater • Function of the relative risk profile of the Issuer and place within the capital structure • Three to seven year investment cycle • Illiquid

  5. Private Equity for the E&P Industry When and Why is it used? When? • Used to facilitate growth in connection with a pending property or corporate acquisition or a development opportunity • Strategic “reloading” of the balance sheet to create dry powder for future growth • Typically fills a capital void left by the debt markets (including bank, mezzanine, and bond markets) • Tapped by Issuers when public equity markets are not available • Provides flexibility in structuring a deal • Adds a knowledgeable financial partner Why?

  6. Active Private Equity Providers Active Private Equity Providers to the E&P Industry • EnCap Investments (Houston; $528MM) • CSFB Capital Partners * (Houston; $750MM) • Natural Gas Partners (Dallas; $600MM) • Kayne Anderson (Houston; $225MM) • Riverstone Holdings * (NYC; $500MM) • First Reserve * (Houston; $500MM) • Quantum (Houston; $300MM) • Energy Trust Partners (Dallas; $115MM) • Yorktown (NYC; $585MM) • Warburg Pincus * (NYC; $750MM) • GreenHill Capital (NYC; $100MM) * Denotes large Energy focused fund; amount listed is estimated portion designated for E&P Note: All fund sizes are estimates

  7. Private Equity Conclusions • Private Equity is a form of risk capital that is consistently available to support the growth of independents regardless of market conditions • Diverse sources of private equity provide opportunities to find a capital partner with a similar strategy and risk profile • Flexibility in structuring an investment vs. inflexibility and fickleness of public equity and debt capital markets • Private equity providers remain hungry for deal flow.


  9. INVESTMENT STAFF Wynne Snoots Mng. Dir. Brent Bechtol Vice Pres. Jason DeLorenzo Vice Pres. Mitch Hovendick Vice Pres. Jason McMahon Vice Pres. Sean Smith Vice Pres. Doug Swanson Vice Pres. Jonathan Shepko Assoc. Travis Winfrey Assoc. Stacy Durbin Analyst EnCap Investments Organization PRINCIPALS David Miller Partner Gary Petersen Partner Marty Phillips Partner Bob Zorich Partner ADMINISTRATIVE STAFF Bobby Haier CFO Donna Wright Controller Audrey White Sr. Acct. John Stricker Sr. Acct. Offices in Houston and Dallas Independent once again!

  10. EnCap Funds Management • 10 institutional funds since 1988 • Over $1.8 billion raised since inception • 3 Producing Property Acquisition Funds (1988 - 1996) • 3 Mezzanine Funds (1988 - 1993) • 4 Equity Funds (1994 - 2003) • Currently raising EnCap Energy Capital Fund V ($700 MM)

  11. Laredo Energy – drill bit growth Ovation Energy – acquire/exploit Sawtooth Energy – mgmt. play Medicine Bow – mgmt. play Nautilus – acquire/exploit Plantation – mgmt. play Petrohawk – mgmt. play Stroud – acquire/exploit Tempest – mgmt. play NCX – drill bit growth 3 Tec – mgmt play BreitBurn – acquire/exploit Plains Resources – mgmt play Bargo – acquire/exploit Cordillera – mgmt. play Matrix – acquire/exploit Copano – midstream growth AROC – acquire/exploit EnCap Industry Partners

  12. EnCap Investments Investment Focus • $10-75 million investment size • Management teams with proven track record and open to opportunistic exit • Equity contribution by management (“skin in the game”) • Focused value creation strategy

  13. EnCap Investments Typical Investment Structure • LLC or Limited Partnership is the most tax efficient for management structure • Common or Preferred Equity • Fund equity as needed for acquisitions and/or development in conjunction with a prudent level of bank debt • Increasing management participation linked to performance • Board representation or control • 3 to 7 year investment horizon

  14. EnCap Recent Activity Response to current environment • In response to current market conditions, EnCap has monetized a significant portion of its portfolio over the last 12 months • Liquidated public securities • Sold Laredo Energy I to Chesapeake Energy in October 2003 after 18 month investment period • Sold Plantation Petroleum to Forest Oil in December 2003 after 18 month investment period • Sold Cordillera to Patina in October 2003

  15. EnCap Recent Activity Response to current environment • Over last 12 months, EnCap has committed $300MM • Laredo II – committed $38 MM • Plantation II – committed $30MM • Nautilius – committed $35MM • Medicine Bow - committed $67MM • Stroud – committed $27MM • Petrohawk – committed $38.3MM • NGL Ventures – committed $50MM

  16. Plantation is managed by Tom Meneley and Bill Walls Plantation I Acquired Maynard Oil Company in July 2002 for $98MM with a $38MM equity investment from EnCap and Liberty Energy In December 2003, Plantation sold Maynard to Forest Oil Company Plantation II Formed in November 2003 EnCap and Liberty backed management to acquire properties in Southeast New Mexico for $20MM. EnCap Recent Activity Plantation I & Plantation II

  17. Laredo Energy is managed by Glen Hart and Graham Whaling Laredo Energy I EnCap Fund IV invested $20MM in a partnership structure with Laredo I in December 2001. In October 2003, Chesapeake Energy purchased Laredo I for $110MM. Laredo Energy II Formed in November 2003 EnCap backed management to acquire Lobo Trend properties from Chevron for $23MM. EnCap Recent Activity Laredo Energy I & Laredo Energy II

  18. What Sets EnCap Apart? • Track Record • Experience • Technical Expertise • Flexibility • Value-Added Partnership

  19. IPAA Private Capital Conference D. Martin Phillips April 19, 2004